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Business Formation

Friday, July 10, 2015

New Provision Added to 2012 JOBS Act Designed to Make Crowdfunding Easier

What are the limitations on private equity funding, and how does this impact start-ups in need of capital? 

Start-ups are the cornerstone of American industry, particularly within the booming technology sector. As a business just starting out, one of the most difficult aspects of growth and development is finding the necessary capital and liquidity to get off the ground – which in turn requires sizable investments from willing venture capitalists. Over the past several years, several private equity companies have endorsed the concept of “crowdfunding,” which allows for contributions by several smaller investors as opposed to one or two large donors. Problem is, federal and state corporate laws have made crowdfunding an administrative nightmare, and start-ups are facing increasingly burdensome paperwork and reporting requirements that are often required within all 50 states as well as by the federal government. 

To alleviate the burden a little, in June, 2015, the federal government lightened this bureaucratic load by amending the 2012 JOBS Act to increase the amount of capital a business can raise from private individuals to $50 million under what is often called a Regulation A filing – which is a major jump from the former $5 million cap. Under the former rules, publicly-traded companies could not accept more than $5 million from individual corporate investors, which significantly dampened the available crowdfunding sources obtainable by blossoming start-ups. Now, this amount has been greatly expanded to allow companies the opportunity to accept offerings from anyone willing to pitch in. 

Also under the new rules, exhaustive paperwork requirements have been somewhat lessened, thereby allowing start-ups the opportunity to focus on business growth and expansion instead of concentrating on dozens of filings (and the associated fees). Previously, once a business hit $20 million in capital investments, it was required to adhere to the recording, filing, paperwork, and fee schedules of any state wherein an investor was located – along with the Securities and Exchange Commission. Now, most companies can file a single report and audit with only the SEC, however additional oversight might be required in certain situations.

Despite these steps in the right direction to enable crowdfunding easier, the new amendments have specific requirements in the area of eligibility, disclosure, caps on amount as well as percentage of shares being offered to individual investors, etc. especially for offerings in excess of $20 million - being referred to by the new moniker of Tier 2 Regulation A filing.

If you have questions about starting a new business or would like to speak to a reputable business attorney, please do not hesitate to contact the Kumar Law Firm based in Austin, Texas today: (512)960-3808. 


Tuesday, June 16, 2015

4 Legal Lessons You Learn From Watching "Shark Tank"

Do I need a business plan?

If you did not know any better, you might guess that a show called “Shark Tank” is about lawyers. But fans of the hit reality show on ABC and CNBC know that the sharks on this series are venture capitalists, including Texas’s own Mark Cuban.

The premise of the show is that entrepreneurs pitch their business, inventions, and ideas to a panel of venture capitalists, a/k/a the sharks, in hopes of getting funding. As you might expect based on the name of the show, the investors are not there to make friends, they are there to make a deal.

There are several legal lessons to be learned from watching the show.

Do not expect your business to succeed if you do not have a business plan. All too often, entrepreneurs on the show are stumped when the sharks ask them very basic questions about their future plans. Sitting down and thinking through how you are going to get from point A to point B is something every business owner should do. 

Legal risks can make a business unappealing to investors. There are several episodes of "Shark Tank" where the sharks love the business or product being pitched to them, but decline to invest because the liability risk is just too great. Identifying your liability risks is a critical part of properly running and valuing your business. 

If you have a good idea, patent it. Patents are like blood in the water to the sharks. Great ideas and inventions are worthless if they can be stolen by others, so do everything you can to protect your intellectual property.

Selling a stake in your business is often emotional. The sharks are obviously tough negotiators, but the business owners they are dealing with often need a reality check when it comes to valuing the company or the product up for sale. Separating the emotional value you put on your business from its market value is very difficult, and often requires outside advice, but it is important to do before you get to the negotiating table, or tank. 

Following these tips will not guarantee your success if you wind up in the shark tank, but they will ensure your business starts out on the right foot. 

If you are an entrepreneur in the Austin area looking for legal advice to help you grow your business, or an inventor needing help patenting your intellectual property, The Kumar Law Firm PLLC can help. Sanjeev Kumar was an engineer and entrepreneur before becoming a lawyer, so he has a unique understanding of what it is like to be in your shoes. Call him today at (512)960-3808 to schedule a consultation.


Monday, May 18, 2015

Austin Tech Company Sues Honeywell for IP Infringement

What litigation strategies should start-ups pursue to protect valuable intellectual property from rivals?


Austin, Texas-based start-up Allure Energy has sued Honeywell International in a case involving innovative thermostat technology.  Allure Energy's Eversense thermostat integrates location-based controls in mobile phones to allow users to control their home environment.  Allure alleges that Honeywell's Lyric thermostat infringes on two of its patents.

In its complaint in the U.S. District Court for the Western District of Texas, Allure Energy seeks damages, profits, and an injunction against Honeywell's use of Allure's technology.  The litigation also alleges that Honeywell engaged in false advertising under the Lanham Act.

In 2012, at a trade show in San Antonio, Texas, Honeywell requested that Allure demonstrate the EverSense thermostat, which is designed to detect users' locations through their mobile devices and automatically adjust temperature settings depending on whether homeowners are going out or returning home.  Allure Energy owns several patents on the technology underlying the smart thermostat.  Honeywell ordered samples and Allure Energy's CEO, Kevin Imes, thought a business partnership might be in the offing.

Instead, says Allure Energy's complaint, Honeywell took the geolocation technology that Allure developed for EverSense and incorporated it into Lyric.  Honeywell has been marketing Lyric since August 2013, according to Imes. 

Imes was previously the founder of an Austin-based intellectual property services firm, Imes IP LLC, as well as 3Gfoto Inc., a mobile imaging software maker, also in Austin.


This is not Allure Energy's first lawsuit against a competitor for infringement of its IP.  The start-up previously sued Nest Labs, now part of Google, in a Texas federal court. 


Intellectual property is often a company's most valuable asset and the crown jewel of many start-ups and growing businesses.  Patent, copyright or trademark infringement by a large competitor can be devastating to a new enterprise, requiring a forceful legal response.

The expert business and intellectual property lawyers of the Kumar law firm in Austin, Texas, can help you protect your IP.  The firm’s expert business strategists can help you choose the best course of action to prevail against competitors and prevent or resolve disputes.  Call (512) 960-3808 for a consultation today. 

Monday, March 23, 2015

Is a Joint Venture Right for My Business?

What factors should be covered in a joint venture agreement?

A joint venture with another company may be a way to grow your business. You may want to exploit a potential market for your products or services, but your business may not have the needed resources. Perhaps there is another company that complements what you do, and the two of you could work together to open up a new market so you can both profit.

That sounds good on paper, but in reality, it can be difficult to pull off. Properly drafted agreements are crucial to avert failure of joint ventures. Some common pitfalls to consider are:
• Rapid consumption of capital: Capital is often used much faster and much earlier than expected. Failure to plan for this may result in a struggle to find more capital and agreeing to a loan on unfavorable terms. The joint venture agreement may include the option of a loan from one of the partners, but the terms should be at least as favorable as a loan from a third party.
• Arguments over control: Each partner will be accustomed to his or her leadership style, and disagreements over management often occur. To manage conflicts in the future, if and when they arise, the joint venture agreement should spell out the management structure, how decisions are to be made and how are any disagreements to be resolved.
• Desire for assets: One partner may want to control the assets of the other party. A smaller company may be willing to give more control to a larger company in exchange for capital, which could result in loss of control over the project and failure in the long run. Assets that each party brings to the venture need to be properly valued and that value should be reflected in reasonable shares of ownership and control.
• Unrealistic profit expectations: Partners want to see profits, but how should they be distributed? An agreement could list priorities as to where profits should go, including paying off debt or investment back into the business.

If you are in the Austin, Texas area and think a joint venture is something that may be in your company’s future, call business and corporate law attorney Sanjeev Kumar at (512)960-3808 for a consultation today. With his successful business background, Sanjeev Kumar provides insightful and effective counsel to business owners and entrepreneurs.


Friday, January 16, 2015

Texas Licensing Requirement for Hair Braiders Struck Down

Can the state require a business owner to take classes and buy equipment unrelated to the business?

The entrepreneurial spirit is usually celebrated, but one woman in Texas found nothing but obstacles in her way when trying to open a school to teach hair braiding. The Texas Department of Licensing and Regulation informed the expert hair braider that she would have to become a state-licensed barber instructor before she could open her own hair braiding school. This would have required 1,500 hours of classes and more than $20,000, in facility and equipment costs, yet none of it was relevant or necessary for a hair braiding business.

A federal lawsuit successfully challenged the licensing requirements. The judge called the rules irrational and found them to be unconstitutional. In just one example, the state required a minimum of five sinks, arguing it was related to health and safety. Braiding hair, however, does not require washing hair. As for Texas sanitation standards, the judge pointed out that a sink was not needed, as braiders could use hand sanitizer, for example.

The Institute of Justice, a legal advocacy group, was involved in bringing the lawsuit. It has been litigating similar cases around the country pushing back against regulations that are supposed to be about public health and safety but might be more about protecting certain professions after political lobbying.

For the hair braider in Texas, she is now able to open her school. It is not the first time she helped to change Texas law. In 1997, she was arrested for operating a braid shop without a barber license. That became legal in 2007.

If you have an idea for a business, The Kumar Law Firm PLLC in Austin, Texas can provide the guidance you need. Sanjeev Kumar has experience as a technology professional and engineer; his business background enhances his legal services. Contact him today at (512)960-3808 for a consultation about forming your business strategies.


Friday, December 26, 2014

Minority Shareholder Rights, or Lack Thereof, in Texas

What rights do minority shareholders have when in dispute with majority shareholders?

When starting a business you need to think about what form that business should take. One option is a corporation. You see yourself as the majority shareholder, with others, possibly investors, getting minority shares. What are the limits to the power of majority shareholders? The state’s supreme court took up that issue earlier this year in the case of Ritchie v. Rupe.

In that case a minority shareholder, Ann Caldwell Rupe, filed a lawsuit against a closely held corporation and its board of directors. She claimed the majority shareholders engaged in oppressive conduct (forcing minority shareholders to lose their rights and/or investment in a corporation to the benefit of the majority) and breached their fiduciary duties by refusing to buy plaintiff’s shares for fair value or meet with prospective buyers. 

Initially the case went well for the plaintiff. The jury found in her favor and the court ordered defendants purchase her shares for $7.3 million. The court of appeals upheld the decision, deciding the defendant directors’ refusal to meet with Rupe’s prospective purchasers constituted oppressive conduct. 

The case turned in the defendants’ favor at the state Supreme Court. It reversed the lower courts’ decisions, deciding that those courts issued orders not authorized by state statute.  The court found that the defendant directors’ conduct was not “oppressive” under the relevant statute, that the statute did not allow courts to order a corporation to buy out a minority shareholder’s investment, and that there was no common-law cause of action for “minority shareholder oppression.” The court sent the case back to trial to consider plaintiff’s breach of fiduciary duty claim.

Often a new business will start as a corporation that is closely held by its founders. Because it’s closely held by a few people, there is no open, public market for these shares. Though initially shareholders may agree to work together and have common goals, as time goes on, differences in managing the business can arise, or if a minority shareholder wants to simply sell his or her shares or retire, majority shareholders may want to limit how much they pay for those shares or put obstacles in the way of the party to find a buyer for the shares.

Before the Rupe decision, when necessary, courts ordered majority shareholders to buy shares owned by minority shareholders at a fair market price set by an independent expert. The Texas Supreme Court decision in this case ended the minority shareholder oppression doctrine in Texas, ceasing that practice by lower courts.  But, the court in Rupe didn’t leave minority shareholders totally defenseless. There are several other potential causes of action minority shareholders may be able to use depending on the circumstances, including breach of fiduciary duty claims.  

If you are starting a business and will either be a majority or minority shareholder the language of a shareholder agreement plays a critical role in the relationship between shareholders and spells out their duties and responsibilities. If you have questions about business formation, shareholder agreement or and what your rights are as a shareholder, call Austin, Texas business law attorney Sanjeev Kumar at (512)323-6060 to schedule a consultation today.


Wednesday, October 22, 2014

Managing Risk in Your Small Business

While starting your own business can be one of the greatest things you ever do, it does not come without risk.  Risk can come in many forms including disaster, debt and legal liability. Successful business owners are cognizant of the risks involved in owning and operating their venture and must manage these risks at every juncture.    Fortunately, there are things that you can do to protect yourself in these situations.

First, you must think about risk even before forming your business.  A major part of how your business manages risks comes from your business structure.  Sole proprietorships and partnerships do not offer the personal asset protection that corporations and limited liability companies (LLCs) do.  The corporation and LLC are considered separate legal entities and therefore their owners and managers are usually not personally liable for debts of the business, except in certain specific situations.  Overall, the structure of your business will have an impact on how you manage risk.

Once your business is formed, it is imperative that you obtain the appropriate insurance.  Some businesses are mandated by law to carry certain types of insurance.  Even if yours is not, you should always have some form of liability coverage.  General liability, errors and omissions insurance, specific coverage for corporations and many other types of insurance are available.  You should choose the insurance that is right for your business and stay up to date so that there is never a lapse in coverage.  

Even though you have taken steps to manage your risk, you should still act cautiously in your day to day operations. Do not to make statements in any forum that can be considered defamation.  It is also important that you pay attention to who you do business with as their reputation can and will be imputed to your business should a controversy arise.  In addition, do you best to avoid conflicts of interest as they can result in your business being viewed in a negative light and possibly expose you up to personal risk and liability.  

All small business owners should develop a relationship with an experienced attorney early on.  It is essential to the success of a small business to retain someone to advise you on risk management.  Austin, Texas business law attorney Sanjeev Kumar can help.  Call (512)323-6060 for a consultation today.


Tuesday, October 7, 2014

Cottage Food Law Reform Has Increased Entrepreneurship in Texas

There is a new movement among Americans- people are earning a living from food made in their home kitchens.  Bakers, canners and gardeners are starting their own businesses and selling their cottage foods to consumers.

Texas has recently passed and reformed the Cottage Food Law legalizing this activity in the Lone Star State.  
The Cottage Food Law was originally passed in 2011 and allowed individuals to sell baked goods, preserves and dried herbs out of their homes.  Then in 2013, the Texas legislature expanded the law to include many different kinds of foods, including but not limited to, candy, coffee and popcorn at craft fairs and other venues.  The revision of the law has also stopped municipalities from using their zoning laws to prohibit the production of cottage foods.  While they could once stop individuals from conducting this type of business out of their residential kitchens, they are now barred from doing so.  While the law has opened up a variety of doors for those wishing to sell homemade foods, there are a number of restrictions.  Cottage food makers cannot produce foods that have the potential to be hazardous to consumers.  They must also complete a food handling course and obtain a certificate of completion.  These courses are readily accessible and affordable.  In addition, all products must be appropriately packaged and accurately labeled in order to be sold.  

Cottage food laws have allowed and inspired many entrepreneurs to start their own businesses out of their homes.  While statistics on the number of businesses started are not available, over one thousand individuals have taken courses specifically related to cottage food handling over the last year.  These laws are enabling businesses to operate with low or no overhead costs and are therefore giving individuals an option that was not available before.  

Although the cottage food business is one that you can engage in out of your home kitchen it is still important to adhere to all of the formalities applicable to any other business.  An experienced business law attorney can assist you with legal concerns associated with formation and operation of a business.  If you are considering starting a cottage food business, or any other type of venture, call Austin, Texas business law attorney Sanjeev Kumar at (512)323-6060 for a consultation today.


Friday, September 19, 2014

What Type of Business is Right For You?

You want to go into business for yourself.  You have developed a business plan, secured the necessary funds and are ready to invest in formation and get your business off the ground.  The first thing you need to do is decide how your business will be organized.  There are many different types of structures available depending upon the size and nature of your business.  The main factors to consider are ownership, taxes and personal liability.

You must consider ownership when choosing a business form.  If you are going to own the business yourself, or with a limited number of other individuals, a sole proprietorship or partnership might be a good fit.  These types of businesses are usually fairly easy and inexpensive to start and maintain.  If your business will be owned by more than a few and/or an indefinite number of individuals, a corporation or limited liability company might be right for you.  Corporations and LLC’s, depending on their structure, allow for a business to have many owners.  These types of businesses are subject to more technical requirements than their counterparts to become established, but they are a good choice for many entrepreneurs.

We all have to pay taxes on our income and the same rules apply to businesses. The business form you choose has an effect on the taxes that you pay.  For example, corporations and LLC’s are usually eligible for more tax benefits than sole proprietorships and partnerships.  When it comes to corporations, the tax treatment depends upon the type (S or C corporation).

Individuals are held responsible for the liabilities of their businesses on a regular basis.  Some business forms can prevent your personal assets from being factored into the equation.  Corporations and LLC’s shield business owners from being personally responsible for business liabilities in most situations.  Sole proprietorships and partnerships do not offer this protection, so if you are likely to be involved in litigation or are taking considerable business loans, you might want to think twice before using these business forms.

It is essential at this point to think about where your business is starting and where you see it going.  Do not worry, if you need to change the business structure to suit your needs in the future, it can be done.  If you are considering starting your own business and need advice as to the structure, call Austin, Texas business formation attorney Sanjeev Kumar at (512)323-6060 for a consultation today.


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